Jamal Mecklai: A fool's forecast

MARKET MANIAC

Having been involved with financial markets for a long time, I have learned several forecasting tricks, all of which have to do with not really saying anything. The first, and commonest, is to give a level but not a date "" in other words, you could say the rupee will reach 46 to the dollar. Or that the dollar will hit 2.00 to the euro. Or whatever. But you never say when.

Another, and less well known, rule, which is particularly valuable when the media is hovering close by, is to say something really outrageous, the thesis being that nobody pays sustained attention to the media anyway, so they'll certainly forget what you said in due course, unless, of course, your outrageous prediction comes true. There are not too many successful users of this rule. Marc Faber comes to mind, although in some senses, his wild predictions of gold at $ 2,000 or even $ 2,500 actually follow rule number one "" he picks a price but not a date. So, too, his prediction that commodity prices could continue to rise for 20 years, or India's boom could continue for 20 years, and so on.

And then, there are the real fools, like yours truly, who "" nudge, nudge "" predict both a rate and a date. For example, back in July 2003, I said the rupee would be 38 (to the dollar) in 5 years. At that time, the rupee had already shocked everybody by strengthening against the dollar from a low of over 48 to about 46.50. Nobody quite knew what to make of it "" the rupee had been falling steadily (and unsteadily) for years and everyone had planned their life with this as a given. Most people were frozen, unable to change their mindset.

My job, as I saw it, was to shake people out of their mindsets. Having a steel-reinforced mindset "" a closed mind, in the colloquial "" is the greatest limitation to growth and happiness. The loudest example I know of this was the evolution of non-Euclidean geometry. As you may know, Euclid, who hung around Alexandria in 300 B.C., was the father of geometry. He had five postulates "" simple things like "the shortest distance between two points is a straight line" and so on "" which formed the basis of geometry. However, the fifth postulate "" "that parallel lines never meet (except at infinity)" "" while relatively easy to digest intuitively, could not be proved and kept mathematicians awake and working for centuries.

It was not until the mid-1800's that a German mathematician named Reimann came up with a novel way of addressing this conundrum. A classic method of proving (or disproving) a hypothesis was/is to assume the opposite and see whether you come up with something meaningful. For years/centuries, whenever mathematicians assumed that the fifth postulate didn't hold "" by assuming, say, that parallel lines meet at 2 points (or 3 points) "" the complex mathematical outputs that resulted were found meaningless in terms of the real world. And so, Euclid's fifth postulate remained (uncomfortably) accepted.

What Reimann did "" and what was revolutionary"" was he recognized that accepting the output of the test as meaningless was actually assuming the fifth postulate was true "" in other words, people's minds were hogtied by the assumption (that the fifth postulate was true). And this went on for CENTURIES. Reimann instead accepted the otherwise meaningless outputs as a different description of reality. This led to the development of Reimann surfaces (which are theoretical constructs defined by these equations) and an entire new arena of mathematics called non-Euclidean geometry, the existence of which enabled engineers to develop much of the modern world we live in.

Clearly, cleaning out your mindset is an important activity, and we need to exercise it frequently "" certainly more often than every 2,000 years. Anyway, returning to July 2003, I didn't know how much the rupee was going to strengthen, but I did know that there were huge quantities of unsold dollars (old mindset) that would be progressively coming to market, which would embolden the trend of a strong rupee and that this would likely excite global investors, all of which could lead to a real bull run. Hence, the comment.

I like to believe the comment, which, of course, got a lot of press play, accelerated dollar sales into the market, making my forecast appear, for a period, sound, but, more importantly, began to change the mindset of several companies, particularly in the IT sector.

So much for changing mindsets and making forecasts. Coming to the present, I was looking at a medium-term chart of USD/INR last week and I thought I saw the emergence of a pattern. And, I thought to myself, what if that pattern were to repeat itself "" as all our technical analyst friends believe they do. The pattern was something like this:

First leg: Sharp drop from 43.55 (Apr 8, 2004) to 45.60 (May 17, 2004). Second leg: Mild correction, followed by a drop to 46.15 (Jun 22, 2004). Third leg: High volatility, followed by a drop to 46.50 (Aug 2, 2004) Fourth leg: Sideways movement, followed by a steady rise to 43.50 plateau (beginning May 2005 and running till Aug 2005)

I noticed that today

First leg: The market has risen sharply from 46.32 (Dec 8, 2005) to 44.96 (Dec 20, 2005) Second leg: Then corrected mildly, and then risen again to 44.10 (Feb 1, 2006)

Could the market be moving into the third and fourth legs of the earlier pattern? If so, (a) the rupee would burst higher back to the 43.50 level by early April [a good budget would certainly boost inflows] (b) it would remain around that level for about a month [RBI would certainly protect 43.50] (c) and then slowly start to slip by early May [perhaps corporate results may not be as good as expected; perhaps export growth could slow] (d) the decline would accelerate from June onwards, with the rupee reaching back to 46.50 by September [current account deficit denizens rejoice]

Now, of course, as we all know, history never repeats itself exactly "" nonetheless, there you have it "" a fool's forecast! Enjoy!